Going green is good for the economy (depending on your economic worldview)

The UK economy will be larger, its households better off, unemployment lower and its businesses richer if it chooses to cut emissions. Say what?

Most studies show tackling climate change will be a drag on the economy, but a new report from Cambridge Econometrics is different. It says the UK economy would be 1.1 per cent bigger in 2030 if it met its carbon targets, despite the costs associated with decarbonisation.

To understand how it came to such a counterintuitive finding, read on.

What the study found

The report found that tackling emissions would be beneficial across the UK economy, from households to industry and even the Treasury. Apart from the boost to GDP, it found there would be 190,000 more jobs in 2030 if carbon budgets are met than if no further action to cut emissions is taken.

It found that energy bills would go up by £127 per household in 2030 and that each home would have to spend another £155 per year. But the cost savings from using less energy would cancel out almost all of these costs.

In total, households would be £565 better off in 2030 because there would be more and better paid jobs. The government would be £5.7 billion in 2030 better off because of higher prices on carbon markets and increased revenues from VAT, income tax and National Insurance contributions. These would more than offset the reduced take from fuel duty.

The UK would also save £8.5 billion in 2030 on oil and gas imports, a significant dent in the £58 billion spent in 2013. The study found that even heavy industry would benefit from decarbonisation efforts, because there would be higher demand for its products like steel in wind turbines and glass in double glazing.

What the study did

These results are surprising because most economic models, including those developed by HMRC and those referred to by the Intergovernmental Panel on Climate Change, conclude that cutting emissions will be a drag on the economy.

For instance, the government’s Committee on Climate Change says meeting the UK’s carbon budgets would cost 0.5 per cent of GDP by 2030. As the Cambridge Econometrics report says, it seems intuitively appealing to assume that decarbonisation efforts would lead to a loss of GDP.

So how does its own analysis come to the opposite conclusion, that tackling emissions will be good for the economy? It explains it like this:

“Macroeconomics is concerned not only with costs, but also benefits, since any transaction is a cost to the buyer and benefit to the sellerâ?¦ changes to the energy system do result in slightly higher costs but they also change the structure of the economy with net benefits.”

That sounds pretty easy to understand. But to really see what’s going on we need to dig deeper into the opposing economic world views that lie behind the opposing conclusions.

Economic world-views

One of these world views is exemplified by George Osborne arguing that public spending crowds out more dynamic investment by private businesses. According to this view, the market always ensures that money is perfectly allocated to the most productive areas of investment.

That means it isn’t possible to increase investment in one sector – like energy efficiency – without reducing investment elsewhere. The more productive investment is said to have been ‘crowded out’.

Another assumption in this economic view is that everyone who is willing to work at the market wage will be able to find a job, so that no-one is unemployed unless they want to be. That mean jobs created by a low-carbon transition can only come at the expense of losing other, more productive jobs elsewhere.

The report sums up what this means:

“The assumptions [in this world view] mean that low-carbon policy intervention will always result in GDP losses: the baseline assumes an optimal outcome, so any departure from this baseline will incur a net cost.”

These assumptions might sound like a bit of a stretch. It implies that all policy interventions – not just decarbonisation – will be bad for growth. An exception might be cutting taxes or regulations that distort the market.

Cambridge Econometrics associate director Phil Summerton tells Carbon Brief that even though there are known deficiencies with this economic approach it is supported by many economists.

Indeed this same approach lies at the heart of the economic models that show decarbonisation to be a drag on growth, as well as the Treasury’s model of the UK economy.

Cambridge Econometrics takes a different approach. It does not assume an optimal baseline with perfectly allocated investment and only voluntary unemployment. Instead it uses real information on the behaviour or individuals and organisations based on the last 30 years of data, to gauge how the economy might react to policy change.

As a result, it finds that a well-designed climate policy can boost GDP and reduce unemployment by transferring spending away from oil and gas imports towards more labour-intensive domestically produced goods in the low-carbon sector.

It says:

“This transition [to a low-carbon economy] means that UK businesses will benefit from increases in demand, at the expense of countries that export oil and gas to the UK.”

Fighting austerity, cutting carbon

Unfortunately for those pushing a low-carbon agenda it is George Osborne’s outlook – the one behind government austerity measures in the UK and around the world – that has been in the ascendancy in recent years.

WWF commissioned the report from Cambridge Econometrics as a way to push its preference for strong climate action. Can it hope to succeed in this strategy when the economic model it relies on seems to have been roundly defeated in policy circles?

WWF head of climate and energy policy Nick Molho tells Carbon Brief:

“I’m quite optimistic on where government is on this. We’ve had more and more engagement with Treasury officials interested in different [economic] approaches.”

Molho thinks this alternative economic outlook is gaining traction, though he admits that change will take time and is gradual. Already much of the current debate in Europe recognises that those arguing for ever more government spending cuts are failing to present a long-term narrative for the future, he says.

It is here that the argument for the low-carbon transition can step in, he suggests, offering the prospect of investment now to drive more competitive and faster-growing economies in future.

The debate over whether the low-carbon transition is a current cost or an investment in the future has loomed large during discussions of the EU 2030 energy efficiency target. So far, there have been moderate gains for those who see it as an investment – a slightly higher than expected 30 per cent goal has been put forward by the European Commission.

The UK election next May is another source of optimism for Molho. He has presented his positive arguments for the benefits of climate action to all three major parties and argues the thinking can be adapted to each of the parties’ political philosophies. If he’s right, maybe we can expect to see a renewed focus on climate in the May 2015 manifestos.

For now, the government is backing climate action even though it officially thinks it will be costly, arguing that the avoided climate damages justify those costs. How much easier might it be to secure strong climate action, if governments thought that action was economically beneficial in its own right?

Should policymakers be choosing between climate change action and economic recovery?Governments have increasingly been using the economic fallout as an excuse for climate inaction. International negotiations are grinding…